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NASDAQ modifies compensation committee independence standards

On November 26, 2013, NASDAQ amended its independence standards for compensation committee members to remove the outright prohibition on compensatory fees. As revised, a board of directors instead must consider the receipt of such fees when determining eligibility for compensation committee membership.

In early 2013, NASDAQ adopted compensation committee independence standards that prohibit members of the compensation committee from directly or indirectly accepting any consulting, advisory or other compensatory fee from the issuer or its subsidiaries, which is the same standard applicable to audit committee members.

In order to match the more flexible rules of the New York Stock Exchange, NASDAQ has amended its compensation committee independence standards to remove the prohibition on the receipt of compensatory fees by compensation committee members. Instead, the revised rule requires that in affirmatively determining the independence of any director who will serve on the compensation committee, a company’s board must consider the source of compensation of the director, including any consulting, advisory or other compensatory fee paid by the company to the director.

NASDAQ has also modified the rule to remove the carve-out from the definition of compensatory fees for fees received by the director as: (i) a member of the compensation committee, the board of directors or any other board committee; and (ii) fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the company. As a result, these fees should be considered in aggregate with all other sources of compensation of the director to determine whether such compensation would impair the director’s judgment as a member of the compensation committee.

The implementation deadline for the new compensation committee rules has not changed. Companies must comply with the amended rules by the earlier of: (1) their first annual meeting after January 15, 2014; or (2) October 31, 2014. Each company must submit a one-time certification to NASDAQ, no later than 30 days after the final implementation deadline applicable to it, that it has complied with the amended rules. The certification form will be available from NASDAQ no later than January 15, 2014.

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